I recently wrote about the entrance of broker custodian Charles Schwab into the automated investments business. Here I examine Schwab’s decision to build a platform on its own, rather than buy a start-up (or partner with one, as Fidelity has done with Betterment). In case you hadn’t seen the news, Schwab has named its zero-cost platform “Schwab Intelligent Investor” and has put up a placeholder site to announce it. I am also adding here to my commentary on this blog and in Investment News by addressing more broadly the implications of the “build vs. buy” question for online brokerage firms. Price pressure from shrinking trading commissions plus the quest for differentiation in an increasingly commoditized business is encouraging these firms to consider rolling out their own advice platforms. Indeed, one firm, TradeKing, has already done so, and other firms are quietly working on their own. For online brokerage firms, the “build” option now is clearly more in vogue than the “buy”. It is tempting to link this trend to the sky high valuations (which are frighteningly reminiscent of the dot.com boom) held by the current batch of automated investment advisors. Yet the decision process around “build vs buy” (or partner) is more complex and to some degree rests with one’s vision of the future. Given the downward pressure on fees (from platforms like Schwab’s) and low barriers to entry, it may not be very long before some of today’s gilded start-ups are on the auction block. At the end of the day, a firm like Schwab may decide to build for a number of reasons. First of all, implementing solutions “in house” versus buying (or even using a vendor, which can be expensive and confining) may simply be part of its DNA. Schwab also may feel that building in house will allow it to move faster to market, and retain the ability (i.e. the code) to innovate or build out the platform at a later date. Acquisition or even partnering (including via a white label solution) can pose some sticky integration problems. On the other hand, the purchase of a B2C start-up would seem to be an obvious way to do an end-run against the limitations that have held back other online brokerages and custodians so far. These limitations center on legacy technology (systems dating back to the early 2000s that are in dire need of updates), and culture (the automated investment managers are mostly software engineers, while the discount brokerages are a mix of techies and investments folk). One might ask if a large custodian based outside the Bay area might even be able to attract enough talented software engineers to do a build-out quickly and right. Schwab, which is based in San Francisco and presumably has ample budget for hiring, may still be challenged in constructing what should be a massive platform offering potentially dozens of portfolio models (compare this to the TradeKing Advisory platform, which offers 10). Already more than six months of concentrated effort has gone into building it. Time will tell if the Schwab approach will be a winning strategy. Certainly Schwab CEO Walt Bettinger’s brash predictions for the success of his platform have raised (at least in terms of expectations) the proverbial bar—not to mention the hackles of his many start-up competitors.